Are Investors Holding Up Loan Modifications?

On the heels of a new report that foreclosures are not in fact abating, as some banking on moratoria and modifications might have expected, I sat down this morning for an interview with Barbara Desoer, president of Mortgage, Home Equity & Insurance Services at Bank of America . B of A is participating in the Obama administration’s Homeowner Affordability and Stability Plan, specifically in the Home Affordable Modification Program.

“As an investor as well as a servicer for our own portfolio, we have a model and we have assumptions that say we are better off as an investor by doing a modification that makes a payment affordable than taking the house to foreclosure,” began Desoer. “If the model says taking the house to foreclosure is the better option, that is the path that we will go.”

It all seems pretty simple over at B of A, the largest loan servicer in the country, with nearly 14 million customers and $2 trillion in mortgages. But it’s only simple for the loans B of A holds on its own books. As we’ve discussed before, the big problem is with the stubborn investors, who have contracts saying the loans cannot, in some cases, be modified. Desoer says they’ve been on the phone with investors, and “some of those conversations have been more successful than others.”

Yesterday, J.P. Morgan CEO Jamie Dimon took investors head on over loan modifications: “I know we’re going to get a lot of complaints from investors in these pools that, maybe, that are going to get hurt modestly by it. Well, they should get over it, okay?”

But the investors don’t have to get over it, not if they think they can make more money taking the home to foreclosure. The question is, why would the math that, say, Bank of America does on a loan, figuring out that the loan would be worth more modified, not jibe with the investor math on the same loan?

“We believe that with the fact base put in front of them and a way for it to be a win win win between the borrower, the servicer and the investor, this cash flow that would have resulted had the home been taken to foreclosure and offering an option to the borrower that gives the investors a better alternative than that, that we will be able to convince some of the investors that this is in their best interests,” argued Desoer.